How a Utility Makes Money – Detailed Description and Course Outline


How a Utility Company Makes Money is a one-day, instructor-led course that covers basic utility finance and rate-making.

Financial Statements

Participants learn the basics of the major financial statements: Income Statement,  Balance Sheet and Cash Flow Statement, including individual line items, general construction, purpose, and the formulas that govern each statement.  They also learn how these financial statements are interconnected with exercises that demonstrate how routine business transactions impact each statement.  Class discussions encourage participants to identify ways to improve their company’s Financial Statements.

Financial Ratios

Return on Equity (ROE) is critical to understanding why decisions are made the way they are in the utility industry.  In this section the components of ROE; Net Profit Margin, Asset Turnover and Financial Leverage; are defined and discussed in relation to each other.  Participants learn how debt levels can favorably or unfavorably impact ROE. 

Capital Investment Analysis

Participants learn the general process for analyzing and evaluating capital projects.  In addition they learn to define and calculate Present Value (PV) and Net Present Value (NPV).

Rate-of-Return Rate-Making

In this section participants learn how the rate-of-return rate-making process governs: Rate Base, Allowed ROE, Return on Rate Base and Revenue Requirement in order to define how a utility makes money.

Business strategies are explained in relation to rate-of-return regulation and PUC oversight, allowing participants to understand the investment and financing tactics that utilities employ to operate only as efficiently as they can to achieve their allowable ROE. 

Evaluation Methods

Numerous methods are used throughout the course to evaluate participant knowledge and build retention.  Turning TechnologyTM Radio Frequency Response Cards, which allow participants to answer questions anonymously while providing comprehension feedback to the instructor, are used by the participants to answer review questions after each section outlined above.  Where appropriate, small group exercises provide participants practice to build financial skills and large group discussions allow the participants to make connections to current events and corporate strategy.

Course Outline

  1. Introduction
    1. Why are you here?
    2. How will you benefit?
  2. Financial Statements
    1. Income Statement
    2. Balance Sheet
    3. Cash Flow Statement
  3. Financial Ratios
    1. Net Profit Margin
    2. Asset Turnover
    3. Debt Ratio and Financial Leverage Ratio
    4. Return on Assets and Return on Equity
    5. Relationship between ROE and Leverage
    6. Relationship between ROE and Capital Projects
  4. Capital Investment Analysis
    1. The Capital Analysis Process
    2. Present Value
    3. Net Present Value
    4. Sample Capital Analysis
  5. Rate-of-Return Rate-Making
    1. Rate Making Process
    2. Rate Base
    3. Allowed ROE / Pre-Tax Weighted Average Cost of Capital / Return on Rate Base
    4. Revenue Requirement
    5. Determining New Rates
    6. Appeals
    7. Federal Energy Regulatory Commission (FERC)
    8. Optional: Modifications to Rate-of-Return Rate Making Specific to Your Service Area
    9. Review: How A Utility Makes Money

Comments are closed.